Chapter 16

Question 1

Analytical Procedures

Answer 1

Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information

Question 2

Commitment

Answer 2

A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements

Question 3

Conservatism

Answer 3

An accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen

Question 4

Contingent Liability

Answer 4

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event

Question 5

Date of the Financial Statements

Answer 5

The date of the end of the latest period covered by the financial statements

Question 6

Disclosure Checklist

Answer 6

A list of specific disclosures required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements

Question 7

Emphasis-of-matter paragraph and other-matter paragraph

Answer 7

A paragraph included in the auditors’ report that is required by GAAS or is included at the auditors’ discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.

Question 8

General risk contingency

Answer 8

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

Question 9

Iron curtain approach

Answer 9

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach.

Question 10

Known misstatements

Answer 10

Specific misstatements identified by the auditors during the course of the audit.

Question 11

Letter of inquiry of the client’s lawyer

Answer 11

A letter sent by auditors to a client’s legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies. The returned letter from the lawyer is referred to as the lawyer’s letter.

Question 12

Likely misstatements

Answer 12

Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates.

Question 13

Loss contingency

Answer 13

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts.

Question 14

Minutes

Answer 14

A formal record of the issues discussed and actions taken in meetings of stockholders and the board of directors.

Question 15

Other information

Answer 15

Financial and nonfinancial information (other than the financial statements and the auditors’ report thereon) that is included in a document containing audited financial statements and the auditors’ report thereon but is not required by a designated accounting standards setter.

Question 16

Other-matter paragraph

Answer 16

A paragraph included in the auditors’ report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors’ judgment, is relevant to users’ understanding of the audit, the auditors’ responsibilities, or the auditors’ report.

Question 17

Report release date

Answer 17

The date the auditors grant the client permission to use the audit report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit report.

Question 18

Representation letter

Answer 18

A single letter or separate letters prepared by officers of the client company at the auditors’ request setting forth certain representations about the company’s financial position or operations.

Question 19

Required supplementary information

Answer 19

Information that a designated accounting standards setter requires to accompany an entity’s basic financial statements. Required supplementary information differs from other types of information outside the basic financial statements because a designated accounting standards setter considers the information an essential part of the financial reporting of certain entities and because authoritative guidelines for the measurement and presentation of the information have been established.

Question 20

Rollover approach

Answer 20

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year. For example, if expenses were understated by $20,000 in the previous year, and $45,000 during the current year, the rollover method would quantify the misstatement as $45,000, ignoring the previous year misstatement. Also see iron curtain approach.

Question 21

S-1 review

Answer 21

Procedures carried out by auditors at the client company’s facilities on or as close as practicable to the effective date of a registration statement filed under the Securities Act of 1933.

Question 22

Subsequent event

Answer 22

An event occurring between the date of the financial statements and the date of the auditor’s report.

Question 23

Supplementary information

Answer 23

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements.

Question 24

Unasserted claim

Answer 24

A possible legal claim of which no potential claimant has exhibited an awareness.